Free & Clear: February 2014

Wheels of fortuneBy John Hood

For any good idea, there are bad arguments. Consider the growing use of public-private partnerships — P3s — to add new highway capacity financed by electronic toll collection. Though North Carolina has only recently entered the field, with the successful launch of the 18-mile Triangle Expressway in Wake County, P3 toll roads are common in Europe, Asia and many U.S. states. Policymakers here want to use the concept to add lanes on the highly congested stretch of Interstate 77 north of Charlotte and to build bypasses to the east and west of the Queen City, among other projects.

I have long favored P3 toll roads. One of the first policy studies published by my think tank, the John Locke Foundation, urged North Carolina leaders back in 1991 to use private companies and new technologies for toll collection and traffic management to help meet the state’s transportation needs.

However, that doesn’t mean I buy every argument for them. Inviting private investment doesn’t mean government is getting something for free, as some lobbyists seem to suggest. And charging motorists by the roads they use rather than by each gallon of taxable gas they consume isn’t likely to change their driving habits much, as some environmentalists claim.

There’s nothing new about financing North Carolina transportation with private capital. For decades, investors have bought state and local road bonds. They bought them to get a good rate of return with relatively low risk (particularly if investors have high incomes and thus benefit disproportionately from the federal tax exemption for municipal bonds). By using debt rather than pay-as-you-go financing, government takes on an additional cost. The deal can still benefit taxpayers, however, if it brings lower costs elsewhere (such as land acquisition) and hastens the completion of projects that pay immediate returns by alleviating traffic congestion or facilitating economic growth.

The same kind of calculation applies to P3 projects. Virtually all road construction involves private investment and private contractors. What’s different about P3 deals is that the investors and contractors are often housed in the same company or partnership and continue to play a role in operating the road after its completion. One of the concept’s true selling points, in fact, is that such integration encourages greater efficiency in road design and construction because companies have a financial incentive to minimize cost over the long run. It’s how they expect to make money on what can be very expensive deals at the front end.

The politics of toll roads has gotten complicated. Initially, libertarians and fiscal conservatives like me were the main advocates. Left-wing groups were the primary opponents, warning of “Lexus Lanes” and the perpetuation of a car culture that gobbles open space, pollutes the air and endangers the planet. In recent years, however, some environmentalists have embraced the concept of charging drivers directly, rather than indirectly through gas taxes, to discourage automobile use and make mass transit more attractive. In response, some conservative activists in North Carolina and elsewhere have come out against P3 toll roads, calling them “crony capitalism” at its worst. The issue might play a role in the primary to determine which Republican takes on U.S. Sen. Kay Hagan in 2014 — N.C. House Speaker Thom Tillis favors the toll-lanes project for I-77, and other candidates don’t.

If environmentalists are gambling that tolls will turn drivers into riders, they are making a bad bet. The vast majority of commuters will never ride a bus or train to work. It would be impractical for a host of reasons. Motorists are well aware that owning and operating vehicles is costly and that government is responsible for some of that cost. Indeed, polls show that the gas tax is routinely among the most unpopular taxes people pay. Nevertheless, transit use as a share of commutes is lower today than it was 20 years ago, despite a small uptick during the Great Recession.

Fiscal conservatives’ concerns about P3 toll roads are not so easily dismissed. Some recent toll deals in San Diego, Detroit and other places have proven to be bad ones, as lower-than-projected traffic counts have brought financial woes. The original sin here is not the use of vendors or tolls but the structure of the partnership. The flipside of offering road companies the opportunity for a healthy return on investment is that they must be willing to shoulder more risk than if they were just bond buyers or highway contractors. The worst projects get built when states and localities agree to “availability-pay concessions” — guaranteed payments — rather than true toll concessions in which companies bear the risk of failing to collect enough revenue to net a profit.

Bob Poole, director of transportation policy for the Los Angeles-based Reason Foundation, helped originate the idea of P3 toll roads in the U.S. He argues that requiring companies to bear real risk is essential to protecting taxpayers. “Requiring such projects to pass a credible return-on-investment test is a way to separate the high-value investments from the cats and dogs,” he says.

Not every project makes sense. In North Carolina, there are solid, practical reasons to doubt the wisdom of tolled bypasses in Gaston and Union counties, for example. P3 toll roads belong in North Carolina’s infrastructure toolbox. But they should be used only when they are the right tools for the job.

John Hood is chairman and president of the John Locke Foundation. You can reach him atjhood@johnlocke.org.